A lot of us have been there. You’ve gotten to a spot where the bills are piling up, your finances are extremely tight, and the credit card debt seems insurmountable.
When all the signs are telling you that you should be doing your best to get things under control, and get a fresh start, where should you begin? What can you do in order to start getting your finances in order?
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Where Should You Start When Getting Your Finances In Order?
The first step in getting your finances in order is to realize that you’re currently in a state of disorganization when it comes to your finances. You probably haven’t set goals or come up with a family budget. But before you get into all that, it’s important to take a step back and first figure out exactly where you are.
Step 1: Take Stock Of Your Current Situation
The first step in my mind in turning your finances around is to take an honest look at your financial situation, and figure out why you’re in the position you’re in. Are you dealing with crushing debt because you’ve got a problem with impulse spending? Are you there because of a health event that lead to medical debt? Is your situation within your control?
For most people, the situation that they’re in is completely within their control, and it’s possible to make headway against debt, and to start saving for the future.
Start tracking
Once you’ve taken stock of where you are, it’s a good idea to get a better picture of your financial picture. To do that it’s a good idea to sit down and figure out what your monthly expenses are. Figure out what income you have coming in, then track what regular recurring expenses you have every month, quarter or year. You can probably just write this all down on a piece of paper. Piece of cake!
Then, since most people tend to just “lose” money every month to miscellaneous spending, start tracking where all of your money is coming and going for a couple of months and get a better picture of what spending is necessary, and what spending is just helping you to dig a bigger hole. We use a software called You Need A Budget 4(review here) at our house to track all of our regular income, expenses and savings goals, and we can quickly take a look at the software these days and see exactly where we are. If you don’t currently use a financial tracking software, I highly recommend it. It won’t take you long (a month or two) to figure out exactly where you are as well.
Know when you need professional help
If you’re in dire straights financially, it’s OK to admit that you need help. Find a non-profit credit counseling agency through someone like the National Foundation for Credit Counseling. They can help you to find someone that’s actually going to help you in your situation, and not add to your problems.
Step 2: Set Goals For Where You Want To Be
Setting goals for where you want to be in the short term, and in the long term is important in knowing what your next steps will be. Goals come in 3 main flavors, immediate, short term and long term.
Immediate Goals
The first thing to set goals for are things you need to take care of right away. Some things you may want to think about doing right way include:
- Cutting your monthly bills: Find places that you can cut your regular monthly costs including comparing cell phone plans, looking for updated insurance, cutting energy costs, refinancing your mortgage or downsizing, cutting the cable TV.
- Adding needed insurance: If you haven’t covered your bases when it comes to life insurance, health insurance, long term disability and so on, get on it!
- Pay off any small obligations: If you have small debts or bills that have gone unpaid, get them taken care of immediately.
Short Term Goals
Set goals that you want to accomplish in the short term, the next week to 3 years. Some ideas for things you can look at in the short term:
- Save up an emergency fund: Think about saving up an emergency fund of at least $1000-2000, even before you pay off debt. If you don’t have debt, you could save even more 6-12 months of expenses is ideal.
- Get out of debt: If you’ve got debt, in most situations you can pay the debt off in the next 1-3 years. Find a debt reduction plan that will work for you, make a budget and get going on paying it off.
- Start a retirement account: Plan to open a Roth IRA with a company that makes it easy to invest, like Betterment.com or Vanguard.
- Save for a big purchase: Think about what big purchases you might be making in the next few years, and think about starting up a goal based savings account with a company like Capital One 360.
Long Term Goals
Anything that might take longer than 3 years or so can be a long term goal. Some ideas for long term goals:
- Saving for college: You could think about starting to save for your child’s education. College costs are only rising!
- Save for retirement: Setup a plan for your retirement savings, and just how much you want to have stashed away by the time you retire.
- Saving for a house: If you’re saving for a house a 20% down payment can take many years to save up. Set the goal now and start saving for a few years from now!
Step 3: Setup A Zero Based Budget
Once you’ve figured out where you are, and what your goals are for the immediate term, short term and long term, it’s time to setup a budget.
The type of budget that I prefer is a zero based budget. A zero based budget has you setup categories for all of your income and expense categories. No dollar of income is left unallocated. That way your money that is “left over” at the end of the month isn’t just disappearing into the ether. It is assigned to a specific goal.
So essentially it works like this:
- Figure out your total net income
- Come up with a total monthly figure for giving and saving categories.
- Figure out a total for all of your fixed and irregular monthly expenses.
- Subtract your expenses, giving and saving from your total net income, and you should come up with a zero – thus the name of the budget. If not, you’ve got to figure out where the extra goes!
Once you’ve setup your budget, (again I recommend YNAB4) it’ll be much easier to be in control of your finances. You will have brought order to chaos!
Step 4: Automate What You Can
Once you’ve figured out what your financial situation is, set goals and then put a budget in place, it’s time to take things one step further and automate your finances.
Far too many people get in trouble with their finances because they don’t take the steps to make things in their financial lives happen without them having to constantly remember and have follow through. Instead of hoping that you’ll remember things and get them done, automate things so that they happen without your intervention. Some examples of things you can automate:
- Automate your budget: We’ve already touched on setting up a budget, but it can be a great idea to automate it to a degree using a software like YNAB that will tabulate your income and expenses and give you some nice reports you can use to stay on top of your finances.
- Automate your savings goals: Setup automatic savings goals for big purchases. Save for vacations, house down payments, for your next car and so on. If you’re really bad at saving, use a service like Digit.co that will automate and transfer small amounts from your checking into your savings throughout the month and help you save.
- Automate your investing: Automate your saving and investing by using a company like Betterment that will setup automatic monthly contributions to your Roth IRA or other investment account.
- Automate your bills: Put your bills on auto-pay so that you never forget and get charged a late fee again.
Automating your finances can be extremely helpful, but it isn’t without it’s drawbacks. You’ll still need to stay on top of your budget and make sure that automating things doesn’t lead to a sense of complacency when it comes to your finances. You still need to make sure you’re on top of your financial situation, and you might want to consider having regular budget meetings. Automation is a tool, but not an end-all solution.
So what are some things that you would suggest people do to get started on getting their finances in order? What things did you do, or what tools did you use?
Way to break the debt-conundrum into bite sized pieces. Simple steps and concepts that can all add up to great results.
One thing I would expand upon in the first step is to focus on identifying trouble areas and developing possible behavioral solutions. If you see that a lot of the charges on your credit card are impulse purchases, leave the card at home more often. Small behavioral changes can keep you from getting further and further in debt.
Thanks for the article!
You make a great point about identifying behavioral solutions to problem areas. I didn’t go into that very much in this article as it was already getting long, but maybe a good topic for a follow up article!
I believe Step 2 is most important, although Step 1 is the usually hardest. Having goals is a big reason people can stay on track. I would also add write your goals down and put them somewhere you see them everyday. This makes it easier to remind yourself of what you are striving for.
Setting your goals correctly into place is very important. For a long time I never had goals set in mind. There are also apps on the iphones/other smart phones that are specifically aimed at helping you set money goals.
Tracking my income and expenses is really pretty hard for me. I really want to do it, I think I should focus on that one and have a clear financial goals.
I do best with money when I write down my results. Talk is cheap but if I write down what I’ve done I can see exactly what my money management is really going. Then tweak my goals as necessary.
I absolutely love using simple tools like iphone applications for budgeting my money. It’s secure and also so easy to get hold of an app on your phone. I can check how my spending is going with a tap of a button on my phone.
My favorite is “Making goals for where you want to go.” If you don’t know where you’re going, you can’t possibly make a game plan for how you’re going to get there. You have to be ready for change….you have to realize that what you’re doing is NOT working.
Peter,
This is a GREAT article for jumping in and getting control. A great read and I happily shared!
I have a very difficult time tracking my spending. I hope to get better at this.
Just follow the rules…
Rule #1: Pay yourself FIRST.
Rule #2: Don’t let greedy salesmen/brokers/agents take any of your money in fees, commissions, loads, etc. Do the paperwork yourself with a discount broker – Fidelity, Vanguard, TD Ameritrade, etc., then invest in no-load mutual funds with no front loads, no back loads, and certainly NO 12b1 FEES whatsoever. It will make a difference of hundreds of thousands of dollars by the time you retire!
Rule #3: Don’t waste money on stupid stuff you don’t need. Don’t get $100/month smart phone. I pay $20/month with tMobile. Don’t get $100/month auto insurance. I pay $24/month with Insurance Panda. Don’t spend $50/month on your gym. I spend $15/month at Planet Fitness. All these expenses add up and end up cutting into your savings.
Rule #4 Save at least 10% of your gross income. Join your 401k at work, set up IRAs on your own.
Role #5: Again – Pay attention to your savings. As they grow you will feel empowered
Peter, once again, a big THANK YOU, for just laying down the basics for “getting started” towards attaining financial freedom. Admittedly, this will be a long road, but one that MUST be
taken! Your articles are “no nonsense”, practical,applicable and easy to digest.
Have a wonderful New Year to you and yours.
Mel.